Lost in Translation - the internally invoiced goods and services - Part III.

The all-new Horizon Europe Annotated Grant Agreement out on Fool’s day – are we fooled?

Author: Gábor Kitley

We reached the final part of our blog series, on assessing the changes and/or clarification included in the updated Annotated Grant Agreement (AGA). In the first two parts, we discussed the calculation method for personnel cost, showing you how misleading is the way it is described in the Grant Agreement and the AGA, while last week we were contemplating why the EC changed the hourly rate to daily-rate, also introducing you many scenarios when it is going to be nearly impossible to manage it properly. 

Today, I’d like to share my thoughts with you concerning the (in)famous cost category of the internally invoiced goods and services. If you have never heard of this cost category, then most likely you can stop reading here. 

Internal invoicing is typically (but not exclusively) used by universities, RTOs, or larger companies, and it could apply to many things, like self-produced goods, research facilities, services provided in between cost centres. Basically, it is like putting money from one pocket to another in the same jeans. Jeans are the legal entity, pockets are the departments/faculties, cost centres. Therefore, it is not an actual, but a unit cost.  

In the past couple of years, most financial consultancies I delivered were focusing on assessing and/or developing internal charging and calculation mechanisms for various legal entities struggling with identifying the eligible internally invoiced costs. These clients ranged from animal housing facilities to nuclear research labs, universities, and RTOs to private corporations. They shared the same problems: calculating these costs properly requires a hell lot of extra administration, a good cooperation between the researchers, accountants, and financial managers. When it comes to me – but usually no one believes me at first – I keep saying that personnel cost calculation is a piece of cake compared to internal invoicing of goods and research facilities: once you do the personnel cost calculation correctly for one employee, you simply just repeat the same exercise again and again. Internal invoicing is completely different: typically, each facility used, each service or good provided internally requires a separate calculation. Separate, meaning that you must first consider the type, usage protocols, drivers (m2, units, hours, etc.), finding all relevant costs in the accounting and grouping them properly (like depreciations, capital, utilities, labour costs), then breaking it down to units (as it can only be charged as unit cost!), then implementing a recording protocol on making the number of units direct costs – so linking them to the project. Often, these calculations cost more than the cost you’ll be able to charge to your project at the end. In other words, it is red tape indeed. 

That’s why I, and probably many of you, got excited two years ago when the first rumours came out on Horizon Europe, citing that a huge simplification is about to happen on the internal invoicing. To be explicit – that the EC will be willing to accept the already existing internal pricing/cost policy of the Beneficiaries without further proofs (i.e., detailed cost calculation). That would have been the real red-tape killer for all those organisations using the internal invoicing. I even remember reading newsletters from different “lobbying” associations of various managers and consultants stating that this was partially their success.

So, did it happen? 

No, of course not. Reading the AGA requires the same administration as in H2020. Not a word mentioning that – as gossiped by many  – an internal price/unit cost list is all you need. 

When it comes to making the internally invoiced goods and services, research facilities eligible, you need to go through the same, often painful but always time-consuming calculations. First, to identify the total actual costs of these goods or services incurred over the typical period of time (“pool of cost”), then finding a driver to break it down to units (e.g., cost per hour/usage, m2, mm3, etc), finally, making the necessary records to prove the number of units used on the projects. Even the phrasing remained similar – unspecified and fuzzy – leaving the auditors a hell lot of room to find errors in your calculations. 

It is actually good news to me – I will have a lot of requests also in the future making or cross-checking these calculations for our clients. 

Oh, one more thing! There is indeed a major change at internally invoiced goods and services: since in HE it is a special cost category; the 25% flat rate overheads will NOT be added to your costs. Meaning, you must identify and add your actual indirect costs incurred in direct relation to your internally charged costs, if you can. So, a little extra homework is added to all of us. 

Conclusions – HE is not any simpler or requires less admin burdens than H2020 (except of course when it comes to lump-sum funding. It is actually 70% H2020, 20% bringing back old stuff from FP7, and 10% new (daily-rates).  

But I think we have all learnt by now – the more simplifications are mentioned, the less simple it becomes. 

Don’t forget that we can meet in person for our exclusive Master of Finance and EC Audits in Brussels, on 15-17 May, where we deep dive and practice what the AGA says on personnel cost calculation, time-keeping requirements and internally invoiced goods and services and more! Don’t miss the chance to also practice financial reporting and EC audits in our revamped workshops! Check it out here.  


Lost in Translation - the internally invoiced goods and services - Part III.